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How to Work Through $150,000 in Student Loan Debt

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Trying to Renegotiate $150,000 in Student Loan DebtIn a recent article, I wrote about a former student who was struggling with more than $100,000 of student loan debt.

He’s not the only one.

About two hours after my article hit the wire, I received an email from a grad who’s five years out of school, working a great job in a professional field and looking forward to a bright future. He also happens to be more than $150,000 in the hole for his undergrad and graduate schooling—a combination of $60,000 in fixed-rate federal student loans and $90,000 in adjustable-rate private debt.

Over the course of the next few days, I learned that his student loan debt-load — the monthly payments themselves consume more than 30 percent of his pretax earnings — has caused him to run up even more debt (credit card) as he struggles to cover his living expenses. But despite his trouble, he didn’t blame his family’s limited ability to fund his college experience. Nor did he point a finger at the high school guidance counselor who neglected to tell him about potential tuition-saving resources, such as the College Level Examination Program (CLEP). He didn’t even rail about his schools’ (undergrad and grad) failure to provide good advice regarding the level of debt he was accumulating, or how the lenders — government and private — made it so easy to draw down this funding during his deferment period.

Instead, he wanted to focus on the steps he could take to change course. In particular, he wanted to explore the strategies for negotiating more favorable repayment terms for his government and private loans.

The federal part turned out to be surprisingly straightforward. He qualifies for the newly implemented Pay As You Earn Repayment plan (PAYER), which will help him to reduce his monthly payments. Unfortunately, though, his interactions with the private loan servicing company — not the lender itself — have not been nearly as satisfying.

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Free Credit Check & MonitoringShort-term solution, longer-term pain

He said their customer service representatives were more interested in pitching temporary payment-eliminating or payment-reducing forbearances than they are permanent loan modifications. Not only don’t these short-term accommodations address the underlying problem, but they also prolong the pain. That’s because in either case, the full amount of the interest continues to be accrued on the loan, only to be added back to the balance on which even more interest is then charged (a.k.a. negative amortization).

One option I shared with him is that he can go back with a specific request to extend the duration of his loan so his payments will be reduced to a number he would then be able to afford, while preserving his right to prepay principal. That way he’d have the benefit of a lower payment for as long as he needed without having to forgo the advantage of accelerating his repayment schedule (by adding extra principal amounts), as his cash flow permits.

Sadly, the customer service representative from the loan servicing company stonewalled him. The grad then asked to speak to a supervisor who, after a protracted and heated conversation, reluctantly gave him the actual lender’s number to call so that he could make his appeal on a direct basis.

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The wrench in the works

As it turns out, the lender financed the loans it made with securitized debt of its own, meaning the lender had sold his debt to investors. As many know, this was not an uncommon practice in years past and probably the reason the servicer gave him such a hard time: securitized debt is much less flexible than loans that are actually owned by the lender. Here’s why.

Imagine dumping tens of thousands of contracts into a financial Cuisinart where the resultant ball of dough, so to speak, is rolled out and pizza-wheeled into hundreds of thousands of really thin slices that are then sold all over the world. As such, it would be difficult — if not impossible — to reconstitute and revise the hodgepodge that’s now owned by so many different people in so many different places, right?

So how is it that the loan servicers have the ability to offer forbearances as a matter of due course, but not a permanent modification when both involve extensions of the original loan’s duration? Either way, the securitization investors would have to accept something less than what they originally bargained for.

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Another frustrated grad

While all this was going on, I received another series of emails from a grad who sounded just as frustrated as the other one.

This time though, the issue concerned government loans that had been transferred to a servicer that qualified under an obscure provision of the Affordable Healthcare Act. The assignment itself was innocuous, but soon after it occurred, the new servicer unilaterally decided to reduce the woman’s monthly payments by $100 and extend her loan duration in the process. When she called to question the change, the customer service representative told her they had “reevaluated” her loan and determined that she’d been charged the wrong amount.

Despite her protests, the servicer refused to reinstate the payment she’d been remitting to that point. So, she decided to continue paying the same amount, nonetheless, and have the added value applied against principal, which would have kept her on track for paying off her loans. But, to her frustration, the company routinely disregards her instructions and credits the added amounts against future loan payments, which defeats the purpose.

With all this in mind, it’s hard not to think of student loans as “the gift that keeps on giving” for some, including:

  • Lenders that continue to earn healthy rates of interest on the outstanding balances.
  • Financial services companies that were paid a fee for the loans they originated on behalf of the government and now stand to earn additional fees for servicing the same contracts, not to mention bonuses for extracting payments from defaulting borrowers these firms may have permitted to become so delinquent in the first place.
  • The schools that are these days engaging so-called default management companies in an effort to channel soon-to-be-graduates into payment modification and forbearance arrangements, all in an effort to influence the cohort default rate because of its impact on the school’s continuing eligibility for federally-supported aid.

At some point—hopefully, sooner rather than later—we’ll accept the fact that everyone plays a role in this mess: government, private lenders, schools, students and parents. Perhaps then, we’ll resolve to commit the resources that are needed to comprehensively address all the aspects of this abominably flawed system once and for all.

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  • Joe Bobb

    Another overlooked travesty in student loan debt is the meager $2500.00 interest tax deduction.How many thousands of borrowers pay twice or even three times this.Even worse,the deduction may go back to Bush era rules which allow only the first 5 years post graduation to be written off.With todays social media avenue available to young grads,I suggest this,USE IT!!!!BLAST YOUR CONGRESS,SENATE,AND EVEN THE PRESIDENT(SINCE HE USED IT TO GET ELECTED)AND DEMAND DOLLAR FOR DOLLAR TAX DEDUCTION.IF IT HURTS THE LENDING COMPANIES,TOO BAD,THEY’RE MAKING BANK ANYWAY.WAKE UP YOUTH OF AMERICA,THIS IS YOUR FUTURE!!!!!!!!!

    • Ann

      Not only that, but there is an income limit on the deduction of like $80,000. So if you earn more than that, you can’t deduct anything. $80,000 is a good salary, but not when you are paying back more than $30K a year in loan payments (undergrad + law school), NONE of which are deductible.

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  • Jack Van Kuiken

    Who can I talk to about student loans. My debt is 700,000 and I have never made a payment due to an income of 32000 for myself and 22000 for my wife.

    • Gerri Detweiler

      Jack-

      Is that correct – seven hundred thousand? Or do you mean seventy thousand? At any rate, can you tell us a little more about your situation? Are your loans private or federal? What have you done so far to try to address them?

  • Kristin O.

    Thank you for your article!
    How would you remedy the situation you referenced? If the company continues to do this, how can you fix it?

    “Despite her protests, the servicer refused to reinstate the payment she’d been remitting to that point.

    So, she decided to continue paying the same amount, nonetheless, and have the added value applied against principal, which would have kept her on track for paying off her loans.

    But, to her frustration, the company routinely disregards her instructions and credits the added amounts against future loan payments, which defeats the purpose.”

    • http://www.mitchelldweiss.com Mitchell D. Weiss

      If in fact the loan payment was improperly calculated at the start, there’s nothing you can do about the correction other than to add an extra principal amount to each of the monthly payments in order to arrive at the place you originally intended (paying off the loan early). However, to the extent the loan servicing company fails to follow your explicit instructions about the application of the extra payment amounts, then contact the federal government, file a complaint and ask for assistance. Keep in mind, the loan servicing company is a subcontractor—they are beholden to the government. You can also file a complaint with the Consumer Financial Protection Bureau, as the other grad in my article ended up doing.

      • Monica Mixon

        You have to make sure that you send if you are going to pay your loan…pay the monthly amount of your loan…and with a SEPARATE check calculate whatever extra you wanna pay and write PRINCIPAL on that check. Even if they ignore you and mess up, if they cash that check, you can always eventually make them credit your account on the principal by submitting a copy of the said check. I had to do it and I made them GO BACK and input it into the system, then monitor it online on my account. If you have not sent a separate check for the principal, then they don’t had dot do it. They ignore instructions, but can’t ignore the CHECK!! Also, and even though they will put you through hell..every loan as a 2-3 window where NO interest accrues not he account. If you can find out what those dates are, submit payment online on THOSE days and it can only apply to the principal!!!’

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  • marcus

    I borrowed $140,000 for 9 years of education. Mind you I had returned to school as an adult in my 30′s. In my 20′s I attended school and paid off my loans totaling $60,000.
    I began paying on my loans in 1999. In 2002 they were consolidated by the federal government at the interest rate of 6.78%. I have been paying on my loans ever since. Now with interest I owe over $264,000. I can’t get out from underneath this debt. My annual income now is less than $22,000 a year. A few years ago I actually earned closer to $40,000 so making payments was easier. I struggle now since loosing my full time job in May 2012. I work part time since then. I spend 4 – 5 hours a day applying for positions 5 days a week now for over a year for a full time job. I am struggling to keep a roof over my head and not become homeless. I have lived simply all my life. No TV, no radio, no stereo. My phone is a simple minute phone with no apps, no texting. I drive a 6 year old car that I am still paying on. My furniture was acquired from friends or through a second hand store. I grow my own food so to reduce expenses.

    I have to figure out weekly whether to pay a bill, or purchase medicine that I need to live. I had health insurance for the first time in my life while working full time the last 5 years. Now without it I struggle. My medical costs in 2011 where $941. My medical costs since loosing my insurance in 2012 where $5481.

    My loans are with the federal government, that is who I pay. I cannot get my interest rate lowered by them. Every 6 months I have to file for deferment with numerous forms to complete and hope it is granted.

    Mindfully and Respectfully,
    Marcus

  • Andra G.

    We are in the process of trying to lower our private loans from Sallie Mae and Wells Fargo. What a nightmare! The smart option loan from Sallie Mae cannot be lowered and Wells Fargo does not provide you with helpful assistance. There people are all trained to repeat the same thing. It truly is a shame. How can a college grad pay 650.00 a month in loans, without a salaried job, eat, pay rent, etc.? My son has 70,000.00 in debt which will take him 25 years to pay. I wish I could wave a magic wand and make it disappear. We need to help all of the college students who are trying to fulfill their dreams and reach their career goal. They are our future.

  • Liz X

    As someone with an older loan that requires 15% of one’s income, not the 10%, at a lower income level this is also too onerous. At a higher income level, you just have to choose a lower standard of living. At a lower level there is very little left to cut.

    Another issue is that there are legitimate reasons for allowing bankruptcy. I have a terminal cancer (with a longer life span – typically around 10 -15 years – one of the non-HOodgkin’s lymphomas so will have a cycle of relapse/remission) but am not completely disabled. Yet. So I have to pay the full amount which then compromises my medical care because my income is much lower (currently $844/mo plus $200/mo food stamps) since I am currently unable to work full time due to being in treatment. Applying to be fully disabled makes no sense because then I can’t earn any money at all if I am going to get my loans forgiven and SS disability gives out far less than the poverty level due to how little I have paid in – so how the heck will I live? As it is I am about 7 weeks away from being homeless partly because of student loan payments. Plus I am not currently fully permanently disabled. Yes there are hardship forbearances, but I need to save them for when the situation is worse than it is right now. At least right now I can more easily live in someone’s back yard in a 13′ trailer with no plumbing. When I am closer to dying from this disease, my immune system more compromised, etc. but not yet fully disabled I will need those limited number of years then, when I have to be able to stay in an apt and can not live in a tent top trailer.

    From what I have read there were few people abusing the bankruptcy clause in student loans prior to making the rules draconian. People can sell houses short, go into foreclosure and yet there are no equivalent options for student loans. There needs to be a bankruptcy escape clause as an intermediate step between disability and temporary hardship. There need to be safeguards (level of debt vs assets should not be the only criteria, there need to be other mitigating issues involved) so this isn’t abused, but it is uncivilized of us as a country what we put some students though who are caught due to circumstances beyond their control. We treat dogs better.

    The added problem is people who will be paying student loans into retirement, not being able to afford that, and then these already poor people having their SS docked for the loan payments when they fall behind. The government should not be allowed to take people’s SS if their income in retirement if their income is below a certain level (that certain level needs to be higher than the poverty line – that poverty line formula was created ages ago and does not accurately reflect the actual poverty line based on today’s expenses just to have a roof over your head in a hovel).

    And yes I have huge student debt I have paid since 2006 without missing a payment (about $97,000 in principal now down from 134,000 initially, my undergrad debt is paid off). I ended up with this much due to getting my first cancer (I have had 3 major ones and several minor ones) in grad school. A combination of crummy student health insurance and the fact that grad assistants aren’t protected by federal anti discrimination laws (it was legal to fire me from my assistantship even though i could do my job since there were no state laws protecting me from discrimination and the federal anti discrimination laws don’t apply to the job part of being a grad student if your employer is your university – that also needs to change). I needed to stay in school to keep insurance and keep loans in deferment but I also needed to live. It also meant I was in school more years than I would have been. I applied for 100′s of jobs but didn’t even get one offer (something about looking like I had cancer with no hair, no eyebrows or eyelashes, wigs, looking gaunt… I am sure got me at the interviews LOL), so I borrowed both subsidized and unsubsidized student loans. I racked up most of my debt while having cancer. It would have been manageable had that not happened.

    Where is the help for me? NONE of the various plans help. It would be easier if they had made the 10% of your income for income dependent repayments be retroactive, but they chose not to do that. Even then taking 10% of $844, which already is not enough to live, leaves even less…

    The entire system needs fixed.

    • KD

      Wow..you paid $97,000 of your loan off. I too am in the same situation I mostly used especially in undergrad school as a way to survive on top of my full time job sometimes having a part time too but I still thinks it’s incredible that you paid so much off. Can you give us some advice on how you manage this.

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  • Dr. Elaine Mostafa

    I am a veterinarian who graduated three years ago and have over $200,000.00 in student loan debt (common for veterinary graduates now). I was told a few weeks ago that my contract will not be renewed for the only decent job that I have had since graduating at the end of this month. Although I now have a little experience, which will probably be the only reason that I land my next job, I am scared to death how long it will take to find the next job. I have found out that the few jobs in my area are receiving over 15 applications each and the hardest hurdle is the fact that I am 5 months pregnant. I will have to defer my loans, again, just when I was starting to make progress. Although I am in a slightly better situation than some others, I still worry about ever being able to get out from under this mess. I want to work and want dearly to pay off these loans, but we graduates have been put into an impossible situation. WE NEED DECENT JOBS! But the corporations and businesses don’t care, they just send any job that they can overseas. I believe that the best days in America are over and that it will take decades before anything gets better, partly because of this whole student loan debacle.

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  • Dave

    Why is no emphasis placed on individual responsibility? Who’s fault is if you don’t ask questions? Who’s fault is it if you take out loans you can’t afford? Who’s fault is it when you take a course of study that will only net you a worthless degree?

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  • Ralph

    I am a recent grad, have a job and can pay my loans. however even though i am one of the lucky few to even have a job in my degree field (and another job on the weekends) my monthly payment is 70% of my take home income thus killing any chance i have of being on my own for many years to come. the worst part is there is nothing i can do to change it, 123,000 is parent plus but because i cannot claim them (and they didnt offer private loans in 2008) i cannot use any goverment programs to consolodate to a lower payment. the other 32,000 is stafford which just add to the misery. 155000 @ an average of 7.9% interest for 25 years is no joke. this has to be stopped. how do you expect my generation to get ahead?

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  • Gerri Detweiler

    Liz – I am so sorry to hear what you’ve been through and agree there need to be changes. There is a recent case that may open up the way for more bankruptcies though it remains to be seen what kind of effect it will have: http://www.bankruptcylawnetwork.com/student-loans-may-now-be-discharged-more-easily-in-bankruptcy-in-the-9th-circuit/

    In the meantime, I hope you can share your story with your legislators and the Consumer Financial Protection Bureau, both of which need to hear from borrowers like you.

    • kidsandliz

      Thanks. I will look into it.

  • kidsandliz

    No I still owe around that, might be $94,000 – have to look it up. My total debt was initially around $136,000.

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